Decisions4Dairy - Cost of production: How do UK dairy farm economics compare to the rest of the world?

Published 28 August 16

How do UK dairy farm economics compare to the rest of the world?

The global picture in 2015/16

The world milk price experienced a sharp decline in 2014, continuing into 2016, as shown in Figure 1. This, unsurprisingly, has significantly affected profitability of dairy farms in many countries around the world, despite lower feed prices. Depending on the region, the International Farm Comparison Network (IFCN) estimates that profits fell by between 1ppl in Central and Eastern Europe and 8ppl in North America.

Figure 1: World milk and feed price trends January 2006 to June 2016

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                                                                                                           Source: IFCN

However, in some countries, milk prices have remained above world prices during the downturn. China’s milk price is helped by government support, which aims to increase domestic production and offset China’s high feed prices. India’s milk prices are steadily rising because demand is outpacing production, tariffs help protect against imports and the government helps support the sector. In Russia, a deficit of milk is currently bolstering prices to some extent. US milk prices tend to track global markets but its strengthening economy and strong domestic demand have provided some shelter from the price slump.

Closer to home, Western European average costs of production were 37ppl and 31ppl in 2014 and estimated for 2015, respectively. The UK, at a typical 32ppl ECM in 2014 and estimated to be about 29ppl ECM in 2015, still remains reasonably competitive within the community. Recent sterling devaluations will have reduced this competitive advantage. However, as Figure 2 demonstrates, outside of the EU, American and Oceania costs of milk production are still much lower.

Figure 2: 2014 and a provisional estimate for 2015 average cost of milk production by global region

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                                                                                                                                         Source: IFCN/AHDB

Comparing longer-term sustainability

Using the latest data available, how does the UK compare with previous years but also some selected European competitors? Figures 3 and 4 show net margin performance of milk production in typical herds that represent the statistical average herd size in each of those countries. Figure 3 looks at net margins after cash costs are considered, which provide an indication of short-term viability. Whereas Figure 4 shows net margins after the full economic costs of milk production and can hint at the long-term sustainability, ie being able to cover investment in buildings and machinery, as well as an income for own labour.

Figure 3: Net margins after cash costs 2010-2014 for milk production in selected EU countries

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Note: Country name indicates the typical farm herd size                                                                                Source: IFCN

 

Although the UK hasn’t experienced the highest margins after cash costs compared to some of the other EU countries, it does appear to have had a steadier margin. Only the Denmark typical farm in this comparison had negative net margins, after cash costs, at any point.

We see a different picture when net margins are calculated after non-cash fixed costs are included.

Figure 4: Net margins after full economic costs 2010-2014 for milk production in selected EU countries

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Note: Country name indicates the typical farm herd size                                                       Source: IFCN

The obvious trend seen in Figure 4 is that, during most of the last five years, net margins after all costs are considered, were negative. In comparison to the other five countries, the UK typical farm has fared best with three out of the five years returning a positive margin, albeit small. Some of the reasons explaining the differences in cash net margin results and full economic net margins include:

  • Amount of paid versus own labour
  • Owner occupation levels
  • Levels of depreciation.

Covering full economic costs of production ensures longer-term sustainability, as returns should be providing a return to family labour but also business investments. The UK tends to have lower depreciation costs on a ppl basis due to lower investment levels, compared to its European counterparts. This can mean lower costs in the short term but is this sustainable in the longer term?

 

Footnote:

As a member of the International Farm Comparison Network (IFCN), AHDB Dairy has access to data from 55 major milk-producing countries around the world, compared using a ‘typical’ farm model approach and updated annually. The data is based on a selection of typical farms that represent the most common types producing the highest share of milk within a region or country. It looks at milk production only – all cash and non-cash costs of the dairy enterprise and returns from milk and other income – but excludes youngstock and calves, and costs associated with other dairy income than milk.